Financial Guidance to Help Your Business Succeed

Use a stretch IRA to go the distance

Maybe you’re in the enviable position of not needing your retirement accounts for retirement. If your nest egg is more than adequate, it’s time to start thinking about tax-efficient ways of passing wealth to your heirs. A stretch IRA is designed to do just that.

Extend the benefits

You can turn a regular or Roth IRA into a stretch IRA simply by designating a beneficiary. This can be a child, grandchild or even your spouse — as long as the beneficiary is significantly younger than you. The younger the beneficiary, the longer funds can grow tax-deferred.

A spouse named as beneficiary can, after your death, elect to roll the IRA’s funds over into his or her own IRA. This enables the funds to continue growing tax-deferred or tax-free until your spouse begins withdrawing the funds in retirement.

Children or grandchildren named as beneficiaries have several options. The best choice generally is to hold the funds in an “inherited IRA” that allows them to spread required minimum distributions (RMDs) over their own life expectancy. This maximizes the benefits of tax-deferred or tax-free growth.

However, your beneficiary could take a lump-sum distribution on your death. Or, if you die before beginning to take RMDs, your beneficiary could withdraw the IRA’s funds by the end of the year of the fifth anniversary of your death. And if you die after beginning to take RMDs, your beneficiary could opt to withdraw the funds over your “remaining” life expectancy, as calculated under the IRS’s Uniform Lifetime table as of the year of death.

Beware of lump sums

Although stretch IRAs provide tax advantages, there’s no guarantee your beneficiary will benefit. Your child or grandchild could opt for a lump-sum distribution, which will erase any potential stretch IRA benefits.

If you’re concerned that this might happen, consider naming a trust as beneficiary. Be aware that, for a trust to qualify for stretch treatment, it must meet certain requirements, such as distributing RMDs received from the IRA to the trust beneficiaries.

Make an estate plan

Not all retirement accounts qualify for stretch treatment. (For example, employer-sponsored 401(k) plans follow different rules.) Talk to your tax or estate planning advisor about stretching out IRA benefits and other strategies for transferring wealth.